Powerhouse Points: New Enforcement and New Rules for Made in USA Claims

Written by Partner Kimberly A. Beis for the Fall 2021 Edition of Powerhouse Points,  A Quarterly Litigation Update.

Read the full issue here.

Powerhouse Points:

• Final Rule increases enforcement options for FTC (including civil penalties).

• The Final Rule covers more than just “labels.”

• USDA to launch similar “Made in USA” initiative.

Last year, we talked about the proposed FTC rule regarding “Made in USA” claims. On July 1, 2021, FTC finalized its proposed “Made in USA” Rule, in an effort to “crack down” on false and unqualified claims by companies that their products are Made in the USA. The rule was published on July 14, 2021 in the Federal Register and became effective on August 13, 2021. Some big questions arise – what do we expect the Rule will cover, will FTC increase enforcement of Made in USA claims; will the rule serve as a deterrent, and how will it affect businesses and how they label and/or advertise their products?

FTC has noted that the goal of codifying the Made in USA Rule is to increase deterrence of “Made in USA” fraud as well as to clarify (and codify) some of the standards relating to “Made in USA” claims.  FTC had a number of options regarding the standard for determining how a product qualifies as “Made in USA.”  Those included: (1) a percentage-of-costs standard; (2) allowances made for imported parts or materials not available in the United States; (3) “substantial transformation” test standard (like that used by Customs and Border Patrol); as well as (4) a safe harbor for “good faith” efforts to comply. However, FTC stuck with “all or virtually all” which prohibits unqualified “Made in USA” claims on labels unless (1) final assembly or processing of the product occurs in the United States; (2) all significant processing occurs in the United States; and (3) all or virtually all ingredients or components of the product are made and sourced in the United States.

One of the concerns discussed during the comment period regarding the proposed Rule, was the apparent broadening of the rule to go beyond labeling. The final Rule included the proposed language making it applicable to “any mail order catalog or mail order promotional material.” “Mail order catalog and mail order promotional materials” are defined as “any materials, used in the direct sale or direct offering for sale of any product or service, that are disseminated in print or by electronic means, and that solicit the purchase of such product or service by mail, telephone, electronic mail, or some other method without examining the actual product purchased.” 16 C.F.R. section 323.1(b). The extension of this could be significant – and FTC has noted the Rule will apply beyond physical labels. FTC Chair Lina Khan, who assumed her role as Chair of FTC on June 12, 2021, explained that “the definition of label does extend beyond labels physically affixed to a product. As described in the rule, other depictions of labels are also covered; in some circumstances, labels appearing online may also be subject to the rule. The Commission declines to cover advertising more broadly, as this is inconsistent with the authority granted by Congress.” 86 Fed. Reg. at 37033. The declination to cover “advertising” more generally is somewhat helpful in determining the scope and reach of the Rule, but the new Rule definitely opens the door to additional enforcement, which could create and/or increase risks for many businesses.

Part of the increased risk with the Rule includes the threat of civil penalties (as well as injunctive and other damages). With civil penalties of up to $43,280 per violation, FTC’s power to deal with unqualified Made in USA claims truly has some teeth. While there have been (and continue to be) significant monetary settlements with FTC¹, the ability to assess specific civil penalties for violations gives FTC additional tools to combat fraud in Made in USA claims, which FTC states as their goal.

An interesting result from the proposed (now final) Rule and the comment period, is the response of the USDA. A significant number of comments to FTC in response to the proposed rule, were from shrimpers, ranchers and others who are concerned about how food is labeled, as it relates to country of origin, and the requirements and allowances surrounding those labels.  USDA listened and, in addition to commending FTC on the finalization of the Made in USA Rule, promised to implement similar initiatives at USDA for the labeling of products regulated by FSIS.  Specifically, the USDA secretary noted USDA is “committed to ensuring that the Product of USA label reflects what a plain understanding of those terms means to U.S. consumers.”²    

As we look forward at Made in USA claims for consumer goods regulated by FTC, it remains to be seen what enforcement will look like – but if it is anything like the most recent settlement³,  businesses should be aware that FTC is serious about Made in USA claims and compliance with FTC orders. Made in USA is clearly an important issue for FTC and this new Rule gives it more power to ensure consumers can trust a company claiming its products are “Made in USA.”